Factor accumulation and economic growth in Pakistan: incorporating human capital

TLDR: In this article, the authors examined the long-run and short-run relationship between factor accumulation (i.e. physical capital and human capital) and economic growth by calculating the stocks of human capital and real physical capital.

Abstract: Purpose The purpose of this paper is to examine the long-run and short-run relationship between factor accumulation (i.e. physical capital and human capital) and economic growth by calculating the stocks of human capital and real physical capital. Design/methodology/approach The study uses endogenous growth model, where GDP per worker is the dependent variable and factor accumulation (real physical capital per worker and human capital) is the explanatory variable under the autoregressive distributive lag framework from 1973 to 2014 for Pakistan. Findings The results suggest that there is a long-run relationship between factor accumulation and GDP per worker in Pakistan. Findings of the study are consistent with the endogenous growth model suggesting that accumulation of human capital increases labor productivity, employment level and per capita income, and causes economic growth. Practical implications Developing countries like Pakistan should increase share of human capital for economic development. Government should invest in the education sector because investment in human capital has a large potential of productivity growth and welfare increase in developing countries. Originality/value This study challenges the notion of human capital and real physical capital stock used by different researchers. Considering human capital as a core factor of production, a series of human capital as average year of schooling is calculated by utilizing the perpetual inventory method.

Figures

Table 4.9 Estimation of Long Run Dynamics

Table 4.10 Estimation of Short Run Dynamics

Table 4.5 Estimation of Long Run Dynamics

Table 4.6 Estimation of Short Run Dynamics

Table 4.1 Results of ADF and PP Unit Root Tests

Table 4.2 Unrestricted ECM Model Estimation

Full text

Munich Personal RePEc Archive
Factor Accumulation and Economic
Growth in Pakistan: Incorporating
Human Capital
Arshad, Shahzad and Munir, Kashif
University of Central Punjab, Lahore, Pakistan
30 September 2015
Online at https://mpra.ub.uni-muenchen.de/67012/
MPRA Paper No. 67012, posted 03 Oct 2015 05:42 UTC

Factor Accumulation and Economic
Growth in Pakistan:
Incorporating Human Capital
Shahzad Arshad
*
&
Kashif Munir
†‡
University of Central Punjab,
Lahore, Pakistan
*
MPhil Economics student at University of Central Punjab, Lahore, Pakistan
†
Associate Professor, Department of Economics, University of Central Punjab, Lahore, Pakistan.
‡
Corresponding author: Phone: +92 321 5136276, Fax: +92 42 35954892, email: kashif.munir@ucp.edu.pk

Abstract
The objective of this study is to analyze relationship between factor accumulation and economic
growth in Pakistan for the time period of 1973 to 2014 using ARDL bound testing approach to
cointegration. Considering human capital as a core factor of production we have constructed a
series of human capital as average year of schooling and real capital stock is also generated on
the basis of gross fixed capital formation. Under endogenous growth model bound testing
approach to cointegration suggest that human capital stock, real physical capital stock per worker
and GDP per worker are highly cointegrated. Moreover, human capital and real physical capital
stock are highly significant and growth friendly. Our findings are consistent with the endogenous
growth model suggesting that developing countries like Pakistan should increase share of
education and health in GDP in order to accelerate economic growth.
Keywords: Growth, Factor Accumulation, Capital Stock, Human Capital, ARDL, Pakistan
1

1. Introduction
Sources of long run economic growth in developed and developing countries are the most
debated question in the literature. There are two sources of economic growth, either productivity
growth or factor accumulation (physical capital, employed labor force and human capital).
However, there are three strands in the literature, first who supported the view that, it is
productivity growth that caused economic growth (Chow, 1993; Hu & Khan, 1997; Iwata et.al.
2003; Nachega & Fontaine, 2006). Second who supported the other view that economic growth
is caused by factor accumulation (Krugman, 1994; Beddies, 1999; Young, 2000; Iwata et.al.
2003; Nachega & Fontaine, 2006). Third who consider human capital as an important source of
economic growth (Lucas, 1988; Romer, 1986; Beddies, 1999; Haldar & Malik, 2010). Chow
(1993), Hu and Khan (1997) and Iwata et al. (2003) did not consider human capital as an input
factor in their research. Efficiency of human capital determines level of economic growth (Zeng,
1997). Growth of total factor productivity (TFP) and human capital are necessary to boost
economic growth (Wang & Yao, 2003).
Smith (1776) said that growth actually depends on division of labor force but he did not give a
clear link between them. The concept of economic growth starts with Solow (1956) growth
model. Solow (1956) highlighted the idea that economic growth cannot be explained by
increasing labor and capital only but it was technical progress that contributes to economic
growth along with labor and capital. Solow (1956) growth model was considered as central
framework of economic growth. A number of researchers highlighted the importance of human
capital in past few decades such as endogenous growth theory which was presented by Lucas
(1988) and Romer (1990). They found human capital a primary source of economic growth.
Moreover, it is evident that human capital successfully attracts other factors of production like
physical capital. Lucas (1988) considered education and training as a measure of human capital.
Development of human capital is the sole purpose of education to attain economic growth. Lucas
(1988) and Romer (1990) suggested that a country should invest more on human capital because
it can contribute to economic growth and social welfare. It has purely positive link with labor
productivity and will result into high wages and high expected lifetime returns. Later on, Fogel
(1994) highlighted the point that education and training with good health, strong physical and
mental capabilities can enhance the production of human capital or labor force. Seren and Marti
2

(2013) suggest that in developing countries like Pakistan (where tax payers avoid taxes) with low
nominal tax rate human capital did not contribute to economic growth but inversely.
In spite of the importance of human capital, still the most debated question is what are the key
indicators which are considered as human capital? What should be the most appropriate proxies
for human capital? These proxies are varying across researcher to researcher but they all focused
on either mixture of education and health or separately to measure human capital. In the earlier
literature, literacy rate is used by Romer (1990), to capture the impact of human capital and he
found that it had positive link with growth. Mankiw, Romer, and Weil (1992) prefer enrollment
in secondary school to measure human capital and they conclude that human capital can boost up
the economy. Khan (2005) conducted a single country analysis by using gross secondary school
enrollment, average years of schooling, and life expectancy as an indicator of human capital.
Some studies used education and health expenditure to capture stock of human capital but all
these proxies did not reflect true picture of available human capital stock. Conceptually, all these
proxies were unable to measure the available stock of human capital adequately. Barro and Lee
(1993) developed a proxy (educational attainment) for available human capital stock for 73
countries by using enrollment at different level of education. Wang and Yao (2003) used the
same methodology but with different flow variables to develop a series for available stock of
human capital in China.
Almost every developing country is suffering from two major issues; first how to attain
economic growth and second how to sustain economic growth. Sustaining high growth rate is
more difficult in developing countries. Pakistan economy was growing around 5% per year till
2008 but after that government was unable to sustain this growth rate due to failure of various
policies including political instability. Growth rate was 8% in 2004-05 which was the highest
level but now the million worth question is what government should do to catch that high level
of growth and to sustain it? Many researchers in Pakistan focus on the importance of human
capital by using different proxies to find its link with the economic growth. Abbas (2000) used
enrollment at different level of education (i.e. primary, secondary and higher) as a stock of
human capital (in comparative analysis between India and Pakistan) to analyze its effect on
economic growth. He found that these proxies have positive impact on economic growth. Khan
(2005) analyzed four different measure to capture stock of human capital i.e. literacy rates,
3

Frequently asked questions

Q1. What are the contributions mentioned in the paper "Factor accumulation and economic growth in pakistan: incorporating human capital" ?

The objective of this study is to analyze relationship between factor accumulation and economic growth in Pakistan for the time period of 1973 to 2014 using ARDL bound testing approach to cointegration. Under endogenous growth model bound testing approach to cointegration suggest that human capital stock, real physical capital stock per worker and GDP per worker are highly cointegrated. Their findings are consistent with the endogenous growth model suggesting that developing countries like Pakistan should increase share of education and health in GDP in order to accelerate economic growth. 

Q2. What is the effect of human capital on GDP per worker?

As Human capital (average year of schooling) increase labor productivity by acquiring knowledge and training, which will attract other factor of production like physical capital and in this way human capital cause productivity growth which leads to increase employment level, per capital income and hence economic growth. 

Q3. What are the sources of long run economic growth in developed and developing countries?

There are two sources of economic growth, either productivity growth or factor accumulation (physical capital, employed labor force and human capital). 

Q4. What is the main reason why the authors suggested that a country should invest more on human capital?

Lucas (1988) and Romer (1990) suggested that a country should invest more on human capital because it can contribute to economic growth and social welfare. 

Q5. What is the objective of the study?

The objective of the study is to analyze the relationship between factor accumulation and GDP per worker in Pakistan using ARDL bound testing approach to co-integration from 1973 to 2014. 

Q6. What is the coefficient of capital stock?

Real capital stock is also positively associated with the economic growth and coefficient of capital stock shows that there will be 0.35% marginal change in GDP per worker due to 1% change in the real capital stock. 

Q7. What is the effect of proxy on GDP per worker?

Proxy for human capital is effecting GDP per worker positively and significantly in the long run, it can contribute to economic growth in the long run as suggested in the previous studies by Lucas (1988), Romer (1990), Mankiw et.al (1992), Abbas (2000), Khan (2005), Ali et al. (2012) and Qadri and Waheed (2014). 

Q8. What are the main factors that determine the value of human capital?

Romer, and Weil (1992) prefer enrollment in secondary school to measure human capital and they conclude that human capital can boost up the economy. 

Q9. What is the effect of education on economic growth?

Abbas (2000) used enrollment at different level of education (i.e. primary, secondary and higher) as a stock of human capital (in comparative analysis between India and Pakistan) to analyze its effect on economic growth. 

Q10. What is the main reason why the authors suggest that in developing countries like Pakistan with low tax rate?

Seren and Marti(2013) suggest that in developing countries like Pakistan (where tax payers avoid taxes) with low nominal tax rate human capital did not contribute to economic growth but inversely. 

Q11. How much is the average rate of depreciation of real capital stock?

In order to construct real capital stock using gross fixed capital formation average rate of depreciation is supposed 5% (Siddiqui, 2004). 

Q12. What measures of human capital are used to capture the stock of the economy?

Khan (2005) analyzed four different measure to capture stock of human capital i.e. literacy rates,average years of schooling, gross secondary school enrollment, and life expectancy.